Role Of Financial Intermediaries

The role of financial institution is to provide intermediation between financial and real sector and savers and investors and promote capital formation and economic growth. The study of the national balance sheet shows that over any period, how the ratio of financial assets to total assets has been growing. This ratio is one of the indicators of economic growth. Over the planned period in India, this indicator has been rising, as reflected in the ratio of financial assets total assets, attributed to expanded role of public sector during 1950 to 1990 and large capital investments in capital intensive projects. But more importantly there was more active financial intermediation and widening and deepening of the financial system in terms of range of financial instruments and magnitude of funds raised. During Nineties and later, the importance of financial sector increased due to ongoing economic and financial reforms, privatization, regulation and globalization.

The various financial institutions which trade in these stocks and capital markets are all-India financial institutions like IFC,ICICI and IDBI and various SFCs for which the apex institutions is the IDBI. Institutions which issue primary securities to collect the savings from the public directly are UTI, GIC, LIC, etc., They collect savings of the public directly in the form of units or premiums. These are called investment institutions. More recently some public sector banks such as SBI Indian bank, bank of India, canara bank, etc., have started their mutual funds, as also the LIC and GIC. These are also part of the stock and capital market. The securities traded by them any be the claims of the government or of the private corporate sector. The all- India institutions and state financial institutions like the ICICI, IFC or SFCs, etc., raise resource directly from the public in the form of deposits or by issue of bonds/debentures. They may also borrow from the bank and other financial institutions as also from the RBI. These are called Development Corporations. The range of instruments offered to the public has accordingly widened and the capital market has been deepened and broadened enormously in recent years.